Common Reporting Standard for the automatic exchange of

tax information

Discussion Paper June 2014

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CONTENTS

REQUEST FOR FEEDBACK AND COMMENTS ......................................................................................V 

1.  INTRODUCTION ............................................................................................................. 1 

2.  COMMON REPORTING STANDARD REQUIREMENTS ............................................................. 3 2.1  Who will need to report under the CRS? (CRS Section VIII A and B) .............................. 3 2.2  What accounts will need to be reported? (CRS Section I) .............................................. 4 2.3  How to determine if an account holder is a non-resident (CRS Sections II to

VII) ........................................................................................................................................... 5 Pre-Existing Individual Accounts ..................................................................................... 6 New Individual Accounts ................................................................................................ 6 Pre-Existing Entity Accounts ............................................................................................. 6 New Entity Accounts ........................................................................................................ 6 

2.4  What account information will need to be reported? (CRS Section I) .......................... 7 

3.  CURRENT REPORTING REQUIREMENTS ................................................................................ 9 3.1  Annual Investment Income Report ..................................................................................... 9 

Who needs to lodge AIIRs? ............................................................................................. 9 Frequency of lodgement .............................................................................................. 10 Information reported ..................................................................................................... 10 

3.2  Australia’s Anti Money Laundering/Counter Terrorism Financing regime .................... 11 3.3  Foreign Account Tax Compliance Act ............................................................................. 11 

4.  IMPLEMENTATION PROCESSES AND TIMING ...................................................................... 13 4.1  Legislative changes ............................................................................................................ 13 

Legal basis for automatic exchange ........................................................................... 13 4.2  Significant non-compliance with the CRS by tax authorities ......................................... 13 4.3  ATO system changes to implement the CRS (CRS section 9.3) ..................................... 14 4.4  Reporting Financial Institutions’ implementation processes .......................................... 15 4.5  The CRS Early Adopters Group .......................................................................................... 15 4.6  Australia’s implementation of the CRS ............................................................................. 16 

5.  IMPLEMENTATION AND COMPLIANCE COSTS ................................................................... 17 5.1  Implementation compliance costs ................................................................................... 17 5.2  Recurring compliance costs .............................................................................................. 18 

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REQUEST FOR FEEDBACK AND COMMENTS

The Common Reporting Standard for the automatic exchange of tax information (CRS) was endorsed by G20 Finance Ministers and Central Bank Governors at their meeting on 22 and 23 February 2014. The Government is yet to make final decisions on its implementation in Australia and this discussion paper seeks stakeholder views on:

• timing;

• financial institutions’ potential implementation and compliance costs; and

• suggestions on how to minimise the implementation and compliance costs.

The discussion paper should be read in conjunction with the OECD’s Standard for automatic exchange of financial account information: Common Reporting Standard (CRS).

All information (including name and address details) contained in submissions will be made available to the public on the Treasury website, unless you indicate that you would like all or part of your submission to remain in confidence. Automatically generated confidentiality statements in emails do not suffice for this purpose. Respondents who would like part of their submission to remain in confidence should provide this information marked as such in a separate attachment. Any future request made under the Freedom of Information Act 1982 (Commonwealth) for a submission marked ‘confidential’ to be made available will be determined in accordance with that Act.

Submissions should include the name of your organisation (or your name if the submission is made as an individual) and contact details for the submission, including an email address and contact telephone number where available. While submissions may be lodged electronically or by post, electronic lodgement is strongly preferred. For accessibility reasons, please email responses in a Word or RTF format. An additional PDF version may also be submitted.

Closing date for submissions: 16 July 2014.

Email: BEPS@treasury.gov.au

Mail: Manager International Engagement Unit Corporate and International Tax Division The Treasury Langton Crescent PARKES ACT 2600

Enquiries: Enquiries can be initially directed to Simon Milnes, phone: 02 6263 3268, email: simon.milnes@treasury.gov.au.

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1. INTRODUCTION

Globalisation and technological advances have made it easier for taxpayers to hold investments in financial institutions outside of their country of residence. The ability to exchange taxpayer information between jurisdictions’ tax authorities is critical to combating tax evasion at the international level.

The Common Reporting Standard for the automatic exchange of information (CRS) provides a common international standard for:

• the collection of financial account information by financial institutions in participating jurisdictions on account holders who are residents in another jurisdiction;

• the reporting of that information to the jurisdictions’ tax authority; and

• the exchange of that information with the respective tax authorities of the non-residents.

The CRS includes a requirement for financial institutions to look through certain entities and report on the relevant Controlling Persons.

To minimise business and tax administrations’ implementation and compliance costs the CRS draws on the US’ Foreign Account Tax Compliance Act (FATCA) intergovernmental agreement (IGA) regime for due diligence procedures and reporting.

The implementation of the CRS does not automatically result in information exchange between all countries. A jurisdiction wishing to automatically exchange tax information will still need to enter into an agreement with Australia.

To protect the confidentiality of Australians’ information, Australia does not enter into an agreement to automatically exchange information with another country unless the country has the legal framework and administrative capacity to ensure confidentiality. This would not change under the CRS. The ATO would also able to suspend the exchange of information with another jurisdiction’s tax authority if it determines that there is or has been significant non-compliance with the CRS by that jurisdiction’s tax authority.

The benefit to the Australian Taxation Office (ATO) of implementing the CRS lies in the information it receives from other jurisdictions. As such, its effectiveness is dependent on the number of jurisdictions implementing it, and the way in which it is implemented. Over 60 jurisdictions have committed to implement it, including Switzerland, Singapore, Liechtenstein and the Cayman Islands.

Implementation of the CRS would require Reporting Financial Institutions in Australia to undertake due diligence procedures to identify non-residents and report their financial account information to the ATO. The ATO will use this information to ensure that the non-residents are complying with their Australian tax obligations, and automatically send the information to the respective tax authority of the non-resident each year.

Similarly, Reporting Financial Institutions in other jurisdictions will provide financial information on non-residents in those jurisdictions to their local tax authority. For Australians that are identified by financial institutions outside of Australia this will mean that financial information will be provided to the local tax authority and then the ATO.

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The ATO will undertake identity matching with the information it receives and use a risk-based approach to income match selected cases against individual and business tax returns. If there are discrepancies then the ATO can clarify the information with the specific taxpayer, and any undeclared income can result in taxable income adjustments and penalties and interest.

The CRS, if fully implemented by participating jurisdictions, will improve reciprocal tax information sharing arrangements between Australia and other countries and help ensure Australian residents comply with their tax obligations. A common agreed global standard for automatic exchange of information might prevent the proliferation of inconsistent arrangements. The CRS, however, imposes potentially significant compliance burdens on financial institutions in Australia.

The CRS was endorsed by G20 Finance Ministers and Central Bank Governors at their meeting on 22 and 23 February 2014. The technical details, which comprise a commentary to ensure a consistent application and operation of the CRS and technical solutions on the IT aspects, are currently being finalised by the OECD for presentation to G20 Finance Ministers and Central Bank Governors at their September 2014 meeting. G20 Finance Ministers and Central Bank Governors have committed to work with all relevant parties, including financial institutions, to detail an implementation plan at their September meeting.

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2. COMMON REPORTING STANDARD REQUIREMENTS

2.1 WHO WILL NEED TO REPORT UNDER THE CRS? (CRS SECTION VIII A AND B)

The CRS will require financial institutions in Australia to collect and report information to the ATO, unless they are explicitly exempt.

The CRS broadly defines a financial institution as:

• a depository institution;

• a custodial institution;

• an investment entity; or

• an insurance company that issues or makes payments to investment-linked life insurance or annuity contracts.

Financial institutions therefore include not only banks and other deposit-taking institutions, but also custodial institutions, some brokers, exchange traded funds, most collective investment entities and certain insurance companies.

Financial institutions subject to the CRS are referred to as Reporting Financial Institutions and exempt financial institutions are referred to as Non-Reporting Financial Institutions. Non-Reporting Financial Institutions are considered to be a low risk for use by non-residents to evade their tax obligations.

The most significant Non-Reporting Financial Institutions are:

1. governmental entities, international organisations or central banks;

2. broad or narrow participation retirement funds, or Qualified Credit Card Issuers; and

3. any other entities that present a low risk of being used to evade tax, have substantially similar characteristics to any of the entities described in paragraphs 1 and 2, and are defined in Australia’s implementing legislation for the CRS as a Non-Reporting Financial Institutions, provided that the status as a Non-Reporting Financial Institution does not frustrate the purposes of the CRS.

The range of financial institutions required to report under the CRS is greater than under FATCA. For example, under Annex II to the Australia-US FATCA IGA, Australian financial institutions with a local client base or only low value accounts, are exempt from FATCA’s due diligence and reporting rules. They are not specifically exempt under the CRS.

Each country will be required to identify any other entities that are exempt from reporting. Similar to FATCA, it is expected that Australia would exempt retail and industry superannuation funds (under paragraph 2 above) and self-managed retirement funds (under paragraph 3 above) from CRS reporting requirements. 

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Pre-Existing Individual Accounts

For Pre-Existing Individual Accounts, the requirements distinguish between Higher and Lower Value Accounts. Unlike FATCA, there is no minimum threshold for account balances. Although the CRS uses US dollar thresholds to distinguish between high and low value accounts, it is proposed that fixed Australian dollar thresholds be adopted in Australia.

Lower Value Accounts: for account balances less than A$1,000,000 the residence of the account holder would be determined using either a current residence address test based on documentary evidence or alternatively an indicia search of electronic records. If the indicia search of electronic records is undertaken and no indicia arise, financial institutions will not be required to report the account to the ATO. An account that has indicia present will be a Reportable Account, unless financial institutions elect to apply additional ‘curing’ procedures. The curing procedure generally involves reviewing or obtaining a self-certification and/or documentary evidence from the account holder.

Higher Value Accounts: for account balances greater than A$1,000,000 enhanced due diligence procedures apply, including a paper record search and an actual knowledge test by the relationship manager.

New Individual Accounts

New Individual Accounts require self-certification of the account holder’s jurisdiction of residence for tax purposes and confirmation by the Reporting Financial Institution of the reasonableness of this self-certification.

A Reporting Financial Institution is considered to have confirmed the ‘reasonableness’ of a self-certification if, upon receipt of the self-certification and review of the information obtained in connection with the opening of the account (including any documentation collected pursuant to Australia’s Anti-Money Laundering (AML) and its associated Customer Due Diligence (CDD) requirements), it does not know or have reason to know that the self-certification is incorrect or unreliable.

Pre-Existing Entity Accounts

For Pre-Existing Entity Accounts, Reporting Financial Institutions are required to determine:

• whether the entity itself is a Reportable Person, which can generally be done on the basis of available information (such as AML and CDD requirements) and if not, a self-certification; and

• whether the entity is a passive NFE and, if so, whether it has any Controlling Persons that are non-residents. For a number of account holders the active/passive assessment should be straight forward and can be made on the basis of available information, for others this may require self-certification. Pre-Existing Entity Accounts below A$250,000 are not subject to review.

New Entity Accounts

New Entity Accounts require the same assessments as Pre-Existing Accounts. However, as it is easier to obtain self-certifications for New Accounts, the A$250,000 threshold does not apply.

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The following information is also to be reported:

7. for a Custodial Account:

(a) the total gross amount of interest paid or credited to the account (or with respect to the account) during the calendar year or other appropriate reporting period;

(b) the total gross amount of dividends paid or credited to the account (or with respect to the account) during the calendar year or other appropriate reporting period;

(c) the total gross amount of other income generated with respect to the assets held in the account paid or credited to the account (or with respect to the account) during the calendar year or other appropriate reporting period; and

(d) the total gross proceeds from the sale or redemption of property paid or credited to the account during the calendar year or other appropriate reporting period with respect to which the Reporting Financial Institution acted as a custodian, broker, nominee, or otherwise as an agent for the Account Holder.

8. for a Depository Account: the total gross amount of interest paid or credited to the account during the calendar year or other appropriate reporting period.

9. for any other account, such as equity or debt interests in certain Investment Entities and investment-linked insurance or annuity contracts: the total gross amount paid or credited to the Account Holder with respect to the account during the calendar year or other appropriate reporting period, with respect to which the Reporting Financial Institution is the obligor or debtor, including the aggregate amount of any redemption payments made to the Account Holder during the calendar year or other appropriate reporting period.

The CRS recognises that some of the above information will not always be readily available to financial institutions or easily obtainable from existing account holders, and provides certain exceptions to these information requirements.

• For example, for existing account holders, the TIN and date of birth are not required to be reported if they are not in the records of the financial institution or are not required to be collected under the financial institution’s domestic law. However, financial institutions would be required to employ reasonable efforts to obtain that data within a certain period of time.

Financial institutions in Australia will not be required to report a place of birth.

The TIN requirements refer to the TIN issued by the account holder’s jurisdiction of residence for tax purposes, and not the TIN issued by the jurisdiction where the account is held. The CRS recognises that for Australia an individual cannot be required to report their Australian Tax File Number (TFN).

For a New Account, Reporting Financial Institutions are required to collect and report jurisdiction(s) of residence for tax purposes. For Pre-Existing Accounts, jurisdiction(s) of residence are used as a proxy for jurisdiction of residence for tax purposes, in recognition that it may be difficult and costly for Reporting Financial Institutions to collect this information.

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3. CURRENT REPORTING REQUIREMENTS

Financial institutions are currently subject to similar reporting requirements to the CRS which might assist in minimising Reporting Financial Institutions’ reporting requirements from the CRS. These reporting requirements include the Annual Investment Income Report (AIIR), AML/Counter Terrorism Financing (CTF) regime, and FATCA.

3.1 ANNUAL INVESTMENT INCOME REPORT

Australian investment bodies are required to provide the ATO Commissioner with an AIIR, which includes details on:

• the identity of the investor (for example name, date of birth, entity type, TFN and address);

• the types of investment income paid to the investor (for example interest, dividends, unit trust distributions, fund payments and capital gains); and

• tax withheld on income (for example TFN and non-resident withholding tax) and tax credits available.

The AIIR is the primary ATO approved form for reporting Australian sourced investment income paid to Australian and non-resident investors. Industry currently reports to the ATO in the AIIR a large amount of the investor information required by the CRS. There are administrative penalties for not lodging, not using the approved form, and late lodgement of the AIIR. For large taxpayers, there are strict liability administrative penalties of up to $4,250. Penalties and offences also exist for making a false and misleading statement.

The ATO uses the data from the AIIR to prefill Australian income tax returns, monitor tax compliance, and to report non-resident information to partner countries’ tax authorities, pursuant to information-sharing arrangements under Australia’s bilateral tax treaties.

Who needs to lodge AIIRs?

Investment bodies required to lodge an AIIR include approved deposit-taking institutions (for example, banks, building societies and credit unions), widely held investment entities such as publicly listed companies, unit trusts, and managed funds and their intermediaries (including custodians, nominees, solicitors and share registries). A number of bare trusts also lodge an AIIR.

While most financial institutions that will be required to report under the CRS are already reporting through the AIIR, more institutions will need to report under the CRS. New reporters would include insurance companies that offer investment-linked insurance or annuity contracts and a broader range of professionally managed trusts and collective investment vehicles.

In addition, Reporting Financial Institutions will be required to report on all financial account holders. This would extend to reporting the non-resident Controlling Persons of certain entities (passive NFEs).

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4. IMPLEMENTATION PROCESSES AND TIMING

4.1 LEGISLATIVE CHANGES

Legislation will be required to ensure that financial institutions report information consistent with the CRS and undertake its due diligence procedures. The CRS outlines that to ensure its effective implementation jurisdictions are expected to have certain rules and administrative procedures, including (CRS Section IX):

1. rules to prevent Financial Institutions, persons or intermediaries from adopting practices intended to circumvent the reporting and due diligence procedures;

2. rules requiring Reporting Financial Institutions to keep records of the steps undertaken and any evidence relied upon for the performance of the procedures and adequate measures to obtain those records;

3. administrative procedures to verify Reporting Financial Institutions compliance with the reporting and due diligence procedures and to follow up with a Reporting Financial Institution when undocumented accounts are reported;

4. administrative procedures to ensure that the entities and accounts defined in domestic law as Non-Reporting Financial Institutions and Excluded Accounts continue to have a low risk of being used to evade tax; and

5. effective enforcement provisions to address non-compliance.

If the AIIR is used to report the account information required by the CRS, regulatory changes will be required to extend it to financial institutions that are not currently required to lodge it and to include the additional information required under the CRS.

Legal basis for automatic exchange

Australia’s bilateral tax treaties and ratification of the Multilateral Convention on Mutual Administrative Assistance in Tax Matters provide the legal basis for the automatic exchange of information between Australia and other countries. The bilateral tax treaties and the Multilateral Convention contain strict provisions that require information exchanged to be kept confidential and limit the persons to whom the information can be disclosed and the purposes for which the information may be used.

Australia’s tax authority (the ATO) and another jurisdiction’s tax authority can enter into a Competent Authority (that is tax authority) Agreement (CAA) under the bilateral tax treaties and the Multilateral Convention. The CAA sets out operational requirements such as the content, manner and timing of automatic information exchanges between members. To conclude a CAA with another jurisdiction’s tax authority, the ATO needs to have confidence in the secrecy and privacy requirements of the partner tax authority. The CRS includes the text of a model CAA which will be used as the basis for entering into CAAs with Australia’s prospective CRS partner jurisdictions.

4.2 SIGNIFICANT NON-COMPLIANCE WITH THE CRS BY TAX AUTHORITIES

Under the CAA, the ATO is able to suspend the exchange of information with another jurisdiction’s tax authority if it determines that there is or has been significant

Implementation processes and timing

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The ATO will need to design, build and change IT systems to support processing, storage, encryption/decryption, usage and exchange of CRS data with over 100 partner tax authorities. The ATO anticipates that it would take around 18 months to undertake the necessary changes. This work would commence once the timeframe for implementation is finalised.

4.4 REPORTING FINANCIAL INSTITUTIONS’ IMPLEMENTATION PROCESSES

To implement the CRS, Reporting Financial Institutions will be required to:

• build or adapt their information systems to retain information for identifying, classifying and interrogating customer accounts to comply with CRS due diligence and reporting requirements;

• ensure due diligence information required under the CRS is recorded and linked to client account information;

• implement new procedures for the on-boarding of New Accounts;

• undertake due diligence on Pre-Existing Individual and Entity Accounts; and

• make changes to systems so that information is provided to the ATO (for example updating their AIIR reporting software).

The due diligence for Pre-Existing Individual and Entity Accounts would not be required to be undertaken by Reporting Financial Institutions prior to the commencement of the CRS in Australia.

4.5 THE CRS EARLY ADOPTERS GROUP

A number of countries have committed to an implementation timeframe for the CRS. The CRS Early Adopters Group includes over 40 jurisdictions that have committed to the early adoption of the CRS according to a common timetable, commencing from the 2016 calendar year. Details of the implementation schedule for the Early Adopters Group are set out below:

• Pre-Existing Accounts would be those that are open on 31 December 2015 and New Accounts would be those opened from 1 January 2016. Hence, New Account opening procedures to record tax residence will need to be in place from 1 January 2016.

• The due diligence procedures for identifying High-Value Pre-Existing Individual Accounts will be required to be completed by 31 December 2016, while the due diligence for Low-Value Pre-Existing Individual Accounts and for Entity Accounts will be required to be completed by 31 December 2017.

• The first exchange of information in relation to New Accounts and Pre-Existing Individual High Value Accounts will take place by the end of September 2017.

• Information about Pre-Existing Individual Low Value Accounts and Entity Accounts will either first be exchanged by the end of September 2017 or September 2018 depending on when financial institutions identify them as reportable accounts.